**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, DC 20549**

 
| **ý**                                                                                                                                                                                                        | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                              |
| **For the quarterly period ended August 31, 2003**                                                                                                                                                           |
|                                                                                                                                                                                                              |
|                                                                                                                                                                                                              | **or**                                                                                        |
|                                                                                                                                                                                                              |
| **o**                                                                                                                                                                                                             | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                              |
| **for the transition period from                to                .** |
|                                                                                                                                                                                                              |
| **Commission File Number:  0-12395**                                                                                                                                                                    |
|                                                                                                                                                                                                                   |                                                                                               |  |

 

**ALCIDE CORPORATION**

 

| **Delaware**                                                                           |   | **22-2445061**                       |
|----------------------------------------------------------------------------------------|--------|--------------------------------------|
| State or other jurisdiction of incorporation or organization                           |   | (I.R.S. Employer Identification No.) |
|                                                                                   |   |                                 |
| **8561 154th Avenue North East, Redmond WA**                                           |   | **98052**                            |
| (Address of principal executive offices)                                               |   | (Zip Code)                           |
|                                                                                   |   |                                 |
| Registrant’s  telephone number, including area code  **(425) 882-2555** |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES        ý                        NO        o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

YES        o                        NO        ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as ofAugust 31, 2003:  2,654,638, net ofTreasury Stock.

 

 

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**ALCIDE CORPORATION**

 

**INDEX**

 
| PART I.                                                                                             | FINANCIAL  INFORMATION                                                                                                            |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |
| Item 1.  Financial Statements (unaudited)                                                           |
|                                                                                                |
|                                                                                                | Condensed  Consolidated Balance Sheets – August 31, 2003 and May 31, 2003                                          |
|                                                                                                |                                                                                                                              |
|                                                                                                | Condensed Consolidated Statements of Operations – For the three  months ended August 31, 2003 and August 31, 2002  |
|                                                                                                |                                                                                                                              |
|                                                                                                | Condensed Consolidated Statements of Shareholders’ Equity                                                                    |
|                                                                                                |                                                                                                                              |
|                                                                                                | Condensed Consolidated Statements of Cash  Flows – For the three months ended August 31, 2003 and August 31,  2002 |
|                                                                                                |                                                                                                                              |
|                                                                                                | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                   |
|                                                                                                |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                                                                                |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 |
|                                                                                                |
| Item 4. Controls and Procedures                                                                     |
|                                                                                                |
| PART II.                                                                                            | OTHER INFORMATION                                                                                                                 |
|                                                                                                |
| Item 1. Legal Proceedings                                                                           |
|                                                                                                |
| Item 6. Exhibits and Reports on Form 8-K                                                            |
|                                                                                                |
| SIGNATURE                                                                                           |

 

2

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**ALCIDECORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS**

 
|                                                                                                                                                                                                  |   | **August 31, 2003** |           | **May 31, 2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|----------------|-----------------------|------------|
| **Assets:**                                                                                                                                                                                           |   |                     |           |                  |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Current assets:                                                                                                                                                                                       |   |                     |           |                  |       |
| Cash and cash equivalents                                                                                                                                                                             |   | $                        | 2,900,150      |                  | $          | 2,286,641 |   |
| Accounts receivable – trade,  net                                                                                                                                                                |   | 3,779,837                |           | 3,831,527             |       |
| Inventory                                                                                                                                                                                             |   | 2,003,621                |           | 2,097,097             |       |
| Deferred and prepaid income  taxes                                                                                                                                                                    |   | 310,063                  |           | 243,413               |       |
| Spare parts                                                                                                                                                                                           |   | 889,730                  |           | 884,226               |       |
| Prepaid expenses and other  current assets                                                                                                                                                            |   | 378,794                  |           | 468,863               |       |
| Total current assets                                                                                                                                                                                  |   | 10,262,195               |           | 9,811,767             |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Equipment and leasehold  improvements:                                                                                                                                                                |   |                     |           |                  |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| SANOVA plant assets                                                                                                                                                                                   |   | 17,379,438               |           | 17,037,502            |       |
| Construction in progress                                                                                                                                                                              |   | 2,795,555                |           | 2,596,332             |       |
| Office equipment                                                                                                                                                                                      |   | 602,973                  |           | 567,158               |       |
| Laboratory, manufacturing  equipment and vehicles                                                                                                                                                     |   | 571,796                  |           | 523,718               |       |
| Leasehold improvements                                                                                                                                                                                |   | 73,483                   |           | 73,483                |       |
| Less:  Accumulated depreciation and amortization                                                                                                                                                 |   | (10,744,549              | )              | (9,790,948            | )          |
| Total equipment and leasehold  improvements, net                                                                                                                                                      |   | 10,678,696               |           | 11,007,245            |       |
| Goodwill                                                                                                                                                                                              |   | 478,807                  |           | 478,807               |       |
| Other assets                                                                                                                                                                                          |   | 70,885                   |           | 70,885                |       |
| **Total Assets**                                                                                                                                                                                      |   | **$**                    | **21,490,583** | ** **            | **$**      | **21,368,704** | ** ** |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| **Liabilities and Shareholders’ Equity:**                                                                                                                                                        |   |                     |           |                  |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Current liabilities:                                                                                                                                                                                  |   |                     |           |                  |       |
| Accounts payable                                                                                                                                                                                      |   | $                        | 751,431        |                  | $          | 686,391 |   |
| Accrued expenses                                                                                                                                                                                      |   | 380,546                  |           | 501,578               |       |
| Income taxes payable                                                                                                                                                                                  |   | 115,300                  |           | 115,300               |       |
| Total current liabilities                                                                                                                                                                             |   | 1,247,277                |           | 1,303,269             |       |
| Deferred  tax liability                                                                                                                                                                               |   | 655,238                  |           | 565,287               |       |
| Other  long-term liabilities                                                                                                                                                                          |   | 3,293                    |           | 8,140                 |       |
| **Total Liabilities**                                                                                                                                                                                 |   | **1,905,808**            | ** **     | **1,876,696**         | ** ** |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Commitments and Contingencies                                                                                                                                                                         |   |                     |           |                  |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Redeemable Class “B” Preferred  Stock –$.01 par value;authorized 10,000,000 shares;  issued and outstanding:  August 31, 2003 – 63,675; May 31, 2003 – 63,675 |   | 167,145                  |           | 167,145               |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Shareholders’ equity:                                                                                                                                                                            |   |                     |           |                  |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Class “A” Preferred Stock – no  par value, authorized 1,000 shares; issued and outstanding:  August 31, 2003 – 138; May 31, 2003 – 138                        |   | 18,636                   |           | 18,636                |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Common Stock – $.01 par value;  authorized 10,000,000 shares; issued:  August 31, 2003 – 3,040,597; May 31, 2003 – 3,040,597                                            |   | 30,406                   |           | 30,406                |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Common treasury stock at costAugust 31, 2003 –  385,959; May 31, 2003 – 385,959                                                                                              |   | (7,260,041               | )              | (7,260,041            | )          |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| Additional paid-in capital                                                                                                                                                                            |   | 21,502,828               |           | 21,502,828            |       |
| Retained earnings                                                                                                                                                                                     |   | 5,125,801                |           | 5,033,034             |       |
| **Total Shareholders’ Equity**                                                                                                                                                                   |   | 19,417,630               |           | 19,324,863            |       |
|                                                                                                                                                                                                  |   |                     |           |                  |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                                   |   | **$**                    | **21,490,583** | ** **            | **$**      | **21,368,704** | ** ** |

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

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**ALCIDECORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
|                                                                             |   | **For the Three Months Ended  August 31,** |      |
|----------------------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                                             |   | **2003**                                        |      | **2002** |   |
| Revenue:                                                                         |   |                                            |      |   |   |
|                                                                             |   |                                            |      |   |   |
| Net sales                                                                        |   | $                                               | 4,888,326 |   | $ | 5,015,795 |   |
|                                                                             |   |                                            |      |   |   |
| License revenue                                                                  |   | 308,270                                         |      | 29,397 |   |
|                                                                             |   |                                            |      |   |   |
| Total revenue                                                                    |   | 5,196,596                                       |      | 5,045,192 |   |
|                                                                             |   |                                            |      |   |   |
| Expenditures:                                                                    |   |                                            |      |   |   |
|                                                                             |   |                                            |      |   |   |
| Cost of goods sold                                                               |   | 3,002,936                                       |      | 2,805,278 |   |
|                                                                             |   |                                            |      |   |   |
| Research and development expense                                                 |   | 479,415                                         |      | 590,624 |   |
|                                                                             |   |                                            |      |   |   |
| Consulting expense to related parties                                            |   | 15,000                                          |      | 15,000 |   |
|                                                                             |   |                                            |      |   |   |
| Selling, general and administrative expense                                      |   | 1,570,034                                       |      | 1,535,374 |   |
|                                                                             |   |                                            |      |   |   |
| Total expenditures                                                               |   | 5,067,385                                       |      | 4,946,276 |   |
|                                                                             |   |                                            |      |   |   |
| Operating income                                                                 |   | 129,211                                         |      | 98,916 |   |
|                                                                             |   |                                            |      |   |   |
| Interest income                                                                  |   | 4,087                                           |      | 7,867 |   |
|                                                                             |   |                                            |      |   |   |
| Interest expense                                                                 |   | —                                          |      | (21,048 | ) |
|                                                                             |   |                                            |      |   |   |
| Other income                                                                     |   | 9,420                                           |      | 9,139 |   |
|                                                                             |   |                                            |      |   |   |
| Income before provision for income taxes                                         |   | 142,718                                         |      | 94,874 |   |
|                                                                             |   |                                            |      |   |   |
| Provision for income taxes                                                       |   | 49,951                                          |      | 33,205 |   |
|                                                                             |   |                                            |      |   |   |
| Net income                                                                       |   | $                                               | 92,767    |   | $ | 61,669 |   |
|                                                                             |   |                                            |      |   |   |
| Basic earnings per common share                                                  |   | $                                               | .03       |   | $ | .02 |   |
|                                                                             |   |                                            |      |   |   |
| Diluted earnings per common share                                                |   | $                                               | .03       |   | $ | .02 |   |
|                                                                             |   |                                            |      |   |   |
| Weighted average common stock and dilutive  potential common shares outstanding: |   |                                            |      |   |   |
| Basic                                                                            |   | 2,654,638                                       |      | 2,656,022 |   |
| Diluted                                                                          |   | 2,661,577                                       |      | 2,690,726 |   |

 

See notes toUnaudited Condensed Consolidated Financial Statements.

 

4

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**ALCIDE CORPORATION**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY**

 
|                         |   | **Class “A” Preferred  Stock** |       | **Common Stock** |       | **Additional  Paid-in  Capital** |      | **Common Treasury Stock** |   | **Retained  Earnings** |   | **Total  Shareholders’  Equity** |       |
|------------------------------|--------|------------------------------------------|------------|------------------|------------|----------------------------------|-----------|---------------------------|--------|------------------------|--------|---------------------------------------|------------|
| **Shares**                   |   | **Amount**                               | **Shares** |             | **Amount** | **Shares**                       |      | **Amount**                |
|                         |   |                                     |       |             |       |                             |      |                      |   |                   |   |                                  |       |   |   |   |   |   |   |
| Balance May 31, 2003    |   | 138                                      |       | $                | 18,636     |                             | 3,040,597 |                      | $      | 30,406                 |   | $                                     | 21,502,828 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,033,034 |   | $ | 19,324,863 |   |
|                         |   |                                     |       |             |       |                             |      |                      |   |                   |   |                                  |       |   |   |   |   |   |   |
| Net income                   |   |                                     |       |             |       |                             |      |                      |   |                   |   |                                  |       |   |   | 92,767 |   | 92,767 |   |
|                         |   |                                     |       |             |       |                             |      |                      |   |                   |   |                                  |       |   |   |   |   |   |   |
| Balance August 31, 2003 |   | 138                                      |       | $                | 18,636     |                             | 3,040,597 |                      | $      | 30,406                 |   | $                                     | 21,502,828 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,125,801 |   | $ | 19,417,630 |   |

 

See notes to UnauditedCondensed Consolidated Financial Statements.

 

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**ALCIDE CORPORATIONUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **For the Three Months Ended August 31,** |      |
|------------------------------------------------------------------------------------|--------|------------------------------------------------|-----------|
|                                                                               |   | **2003**                                       |      | **2002** |   |
| **Cash Flows from Operating Activities:**                                          |   |                                           |      |   |   |
| Net income                                                                         |   | $                                              | 92,767    |   | $ | 61,669 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                           |      |   |   |
| Depreciation                                                                       |   | 966,518                                        |      | 861,860 |   |
| Deferred income taxes                                                              |   | 49,951                                         |      | 33,205 |   |
| Decrease (increase) in assets:                                                     |   |                                           |      |   |   |
| Accounts receivable – trade, net                                              |   | 51,690                                         |      | (281,043 | ) |
| Inventory                                                                          |   | 93,476                                         |      | (115,236 | ) |
| Prepaid income taxes                                                               |   | (26,650                                        | )         | 205,000 |   |
| Spare parts                                                                        |   | (5,504                                         | )         | (117,188 | ) |
| Prepaid expenses and other current assets                                          |   | 90,069                                         |      | 8,963 |   |
| Other assets                                                                       |   | —                                         |      | 3,539 |   |
| Increase (decrease) in liabilities:                                                |   |                                           |      |   |   |
| Accounts payable                                                                   |   | 65,040                                         |      | (65,266 | ) |
| Accrued expenses                                                                   |   | (121,032                                       | )         | (279,666 | ) |
| Other long-term liabilities                                                        |   | (4,847                                         | )         | (18,956 | ) |
| Net cash provided by operating activities                                          |   | 1,251,478                                      |      | 296,881 |   |
|                                                                               |   |                                           |      |   |   |
| **Cash Flows from Investing Activities:**                                          |   |                                           |      |   |   |
| Acquisition of equipment                                                           |   | (637,969                                       | )         | (1,160,576 | ) |
|                                                                               |   |                                           |      |   |   |
| **Cash Flows from Financing Activities:**                                          |   |                                           |      |   |   |
| Exercise of stock options                                                          |   | —                                         |      | 5,755 |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 613,509                                        |      | (857,940 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 2,286,641                                      |      | 2,847,581 |   |
| Cash and cash equivalents at end of period                                         |   | $                                              | 2,900,150 |   | $ | 1,989,641 |   |
|                                                                               |   |                                           |      |   |   |
| **Supplemental Disclosures of Cash Flow Information:**                             |   |                                           |      |   |   |
| Cash paid during the period for income  taxes                                      |   | $                                              | 26,650    |   | $ | — |   |
| Cash paid during the period for interest                                           |   | $                                              | —    |   | $ | 21,048 |   |

 

See notes toUnaudited Condensed Consolidated Financial Statements.

 

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ALCIDE CORPORATION

NOTESTO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                     Basis of Presentation

 

In the opinion of management, theaccompanying unaudited condensed consolidated financial statements of AlcideCorporation (the “Company”) for the three month periods ended August 31,2003 and 2002 have been prepared in accordance with the instructions to Form10-Q.  Certain information anddisclosures normally included in notes to financial statements have beencondensed or omitted according to the rules and regulations of the Securitiesand Exchange Commission, although the Company believes that the disclosures areadequate to make the information presented not misleading.  The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with thefinancial statements contained in the Company’s Annual Report on Form 10-K forthe fiscal year ended May 31, 2003. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements contain all adjustments (consisting of onlynormal recurring accruals) considered necessary for a fair presentation.  Certain reclassifications have been made toprior year financial statements to conform to current year presentation.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for thefull year.

 

Stock Option Plans

 

The Company has two stock option plans thatallow granting of options to employees, officers, directors and consultants.  Options granted to directors vestimmediately while all other options vest evenly over a five-year period.  As allowed by Financial Accounting StandardsBoard Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123)and Statement No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure” (SFAS 148), the Company accounts for its stock option plansunder the guidelines of Accounting Principles Board Opinion No. 25, “Accountingfor Stock issued to Employees” (APB 25).

 

The following table illustrates the effect onnet income and earnings per share as if the Company had applied the fair valuerecognition provisions of SFAS 123.

 
|                                                                                                                                                |   | **Three  Months Ended********August 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------|
|                                                                                                                                                |   | **2003**                                       |    | **2002** |   |
|                                                                                                                                                |   |                                           |    |   |   |
| Net income, as reported                                                                                                                             |   | $                                              | 92,767  |   | $ | 61,669 |   |
|                                                                                                                                                |   |                                           |    |   |   |
| Deduct:  Total stock-based  employee compensationexpense  determined under fair value based method for all awards, net of related tax  effects |   | $                                              | 152,300 |   | $ | 150,700 |   |
|                                                                                                                                                |   |                                           |    |   |   |
| Pro forma net loss                                                                                                                                  |   | $                                              | (59,533 | ) | $ | (89,031 | ) |
|                                                                                                                                                |   |                                           |    |   |   |
| Earnings (loss) per share                                                                                                                           |   |                                           |    |   |   |
| Basic – as reported                                                                                                                            |   | $                                              | .03     |   | $ | .02 |   |
| Basic – pro forma                                                                                                                              |   | $                                              | (.02    | ) | $ | (.03 | ) |
|                                                                                                                                                |   |                                           |    |   |   |
| Diluted – as reported                                                                                                                          |   | $                                              | .03     |   | $ | .02 |   |
| Diluted – pro forma                                                                                                                            |   | $                                              | (.02    | ) | $ | (.03 | ) |

 

Recently issued accounting pronouncements

 

In May 2003, the EITF issued a finalconsensus on Issue 01-8, “Determining Whether an Arrangement Contains aLease.”  Issue 01-8 provides guidance ondetermining whether an arrangement is or includes a lease within the scope ofSFAS No. 13 “Accounting for Leases.”  Ifit is determined that a lease exists, the lease and non-lease

 

7

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components of a combined sales arrangementmust be accounted for separately.  Issue01-8 is effective prospectively for arrangements entered into, modified, oracquired in fiscal periods beginning after May 28, 2003.

 

Management has determined that at this timethe revenue derived from the lease component in connection with SANOVAcontracts is not material and, therefore, the Company has not separatelyreported lease revenue.  If in thefuture, the amount becomes material and Issue 01-8 does not change thedefinition of a “lease”, the Company will be required to separately reportlease revenue.

 

2.                                       Accounts Receivable - Trade consisted of thefollowing:

 
|                              |   | **August 31,  2003** |      | **May 31,  2003** |   |
|-----------------------------------|--------|---------------------------|-----------|------------------------|--------|
| Domestic Distributors             |   | $                         | 224,621   |                   | $      | 372,837 |   |
| International Distributors        |   | 1,260,139                 |      | 1,402,504              |   |
| SANOVA Customers                  |   | 2,242,413                 |      | 1,888,840              |   |
| Other Receivables                 |   | 52,664                    |      | 167,346                |   |
| Total Accounts Receivable - Trade |   | $                         | 3,779,837 |                   | $      | 3,831,527 |   |

 

The Company evaluates impairment of its tradereceivables on a regular basis.  Theallowance for doubtful accounts was $28,000 as of August 31, 2003 andMay 31, 2003, respectively, which was estimated based on collection historyand known events.

 

3.                                     Inventory consisted of the following:

 
|                               |   | **August 31,  2003** |      | **May 31,  2003** |   |
|------------------------------------|--------|---------------------------|-----------|------------------------|--------|
| Raw Materials                      |   | $                         | 648,190   |                   | $      | 692,480 |   |
| Finished Products                  |   | 474,317                   |      | 484,426                |   |
| SANOVA Inventory at Customer Sites |   | 881,114                   |      | 920,191                |   |
| Total Inventory                    |   | $                         | 2,003,621 |                   | $      | 2,097,097 |   |

 

4.                                     Commitments and Contingencies

 

As of August 31, 2003, the Company hadcontracts for future startups of four poultry and three red meat processingoperations.  These systems will beinstalled in the second and third quarters of fiscal 2004 at an approximatetotal cost of $1,850,000.  As ofAugust 31, 2003, $1,120,000 of the equipment required for theseinstallations was on hand.

 

5.                                       Earnings Per Share

 

Basic earnings per share is computed bydividing net income by the weighted average number of common shares outstandingduring the period.  Diluted earnings pershare is computed by dividing net income by the weighted average number ofcommon shares and potential common shares outstanding during the period.Potential common shares of the Company include the dilutive effect ofoutstanding stock options and warrants. Potential common shares excludedbecause of their antidilutive effect were 320,096 for the three month periodended August 31, 2003, and 190,192 shares for the three months endedAugust 31, 2002.

 

8

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Basic and diluted earnings pershare were calculated as follows:

 
|                                                                                                                                                                     |   | **Three  Months Ended  August 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                                     |   | **2003**                                 |   | **2002** |   |
|                                                                                                                                                                     |   |                                     |   |   |   |
| Net income                                                                                                                                                               |   | $                                        | 92,767 |   | $ | 61,669 |   |
| Weighted average number of common shares  outstanding                                                                                                                    |   | 2,654,638                                |   | 2,656,022 |   |
|                                                                                                                                                                     |   |                                     |   |   |   |
| Basic earnings per share                                                                                                                                                 |   | $                                        | .03    |   | $ | .02 |   |
| Assuming exercise of options and warrants  reduced by the number of shares which could have been purchased with the  proceeds from exercise of such options and warrants |   | 6,939                                    |   | 34,704 |   |
| Weighted average common shares outstanding  and dilutive potential common shares                                                                                         |   | 2,661,577                                |   | 2,690,726 |   |
|                                                                                                                                                                     |   |                                     |   |   |   |
| Diluted earnings per share                                                                                                                                               |   | $                                        | .03    |   | $ | .02 |   |

 

6.                                       Ordersfor Future Delivery

 

At August 31, 2003 and 2002,the Company had orders for future delivery of $686,548 and $637,722,respectively.  The $686,548 orders forfuture delivery are scheduled for shipment during the periodSeptember 2003 through November 2003.  Data for both years excludes expected sales of SANOVA becausecontracts with SANOVA customers do not require placement of purchase orders forfuture delivery.

 

7.                                       SegmentInformation

 

The Company follows theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 131,“Disclosures about Segments of an Enterprise and Related Information” andreports segment information in the same format as reviewed by the Company’smanagement (the “Management Approach”), which is organized around differencesin products and services.  Managementhas determined the Company has two reportable segments, Animal Health andSurface Disinfectants and SANOVA Food Antimicrobial Products.

 

The Company’s reportablesegments are strategic business units that offer similar products, but toentirely different customers at substantially different selling prices and costof goods sold structures.  The Companydoes not have any inter-segment revenues.

 

The accounting policies of thesegments are the same as those described in Note 2 — Summary of SignificantAccounting Policies in the Company’s May 31, 2003 Form 10-K.  The Company evaluates performance based ongross margin from the sale of each segment’s products and does not allocateexpenses beyond gross margin to the two segments.

 

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Segment net sales, gross margin, assets,fixed asset additions and depreciation expense are as follows:

 
|                                    |   | **Three  Months Ended August 31,** |    |
|-----------------------------------------|--------|-----------------------------------------|---------|
|                                    |   | **2003**                                |    | **2002** |   |
| Animal Health and Surface Disinfectants |   |                                    |    |   |   |
| License Revenue – U.S.             |   | $                                       | 308,270 |   | $ | 29,397 |   |
| Net Sales – U.S.                   |   | 524,995                                 |    | 838,283 |   |
| Net Sales – International          |   | 835,700                                 |    | 823,126 |   |
| Total Revenue                           |   | 1,668,965                               |    | 1,690,806 |   |
| Gross Margin                            |   | 1,044,842                               |    | 913,438 |   |
|                                    |   |                                    |    |   |   |
| Assets (at end of period)               |   | 3,150,599                               |    | 2,750,886 |   |
| Fixed Asset Additions                   |   | —                                  |    | — |   |
| Depreciation Expense                    |   | 1,344                                   |    | 1,344 |   |
|                                    |   |                                    |    |   |   |
| SANOVA                                  |   |                                    |    |   |   |
| Net Sales – U.S.                   |   | 3,527,631                               |    | 3,354,386 |   |
| Gross Margin                            |   | 1,148,818                               |    | 1,326,476 |   |
|                                    |   |                                    |    |   |   |
| Assets (at end of period)               |   | 14,404,927                              |    | 15,823,850 |   |
| Fixed Asset Additions                   |   | 611,011                                 |    | 1,104,578 |   |
| Depreciation Expense                    |   | 934,935                                 |    | 833,089 |   |
|                                    |   |                                    |    |   |   |
| Not Segment Related                     |   |                                    |    |   |   |
| Assets (at end of period)               |   | 3,935,057                               |    | 3,030,136 |   |
| Fixed Asset Additions                   |   | 26,958                                  |    | 55,998 |   |
| Depreciation Expense                    |   | 30,239                                  |    | 27,427 |   |
|                                    |   |                                    |    |   |   |
| Total                                   |   |                                    |    |   |   |
| License Revenue                         |   | 308,270                                 |    | 29,397 |   |
| Net Sales                               |   | 4,888,326                               |    | 5,015,795 |   |
| Total Revenue                           |   | 5,196,596                               |    | 5,045,192 |   |
| Gross Margin                            |   | 2,193,660                               |    | 2,239,914 |   |
|                                    |   |                                    |    |   |   |
| Assets (at end of period)               |   | 21,490,583                              |    | 21,604,872 |   |
| Fixed Asset Additions                   |   | 637,969                                 |    | 1,160,576 |   |
| Depreciation Expense                    |   | 966,518                                 |    | 861,860 |   |
|                                         |        |                                         |         |  |  |  |  |

 

Assets assigned to the business segmentsinclude accounts receivable, inventories, fixed assets, spare parts andgoodwill.  No single customer accountedfor 10% or more of revenues.

 

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PART I.

 

ITEM 2.                             Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

Introduction

 

AlcideCorporation (the “Company” or “Alcide”) is a Delaware Corporation organized in1983 which has its executive offices and research laboratories at 8561 154thAvenue N.E., Redmond, Washington 98052.

 

Alcideis engaged in the research, development and commercialization of uniquechemical compounds having intense microbiocidal activity.  The Company holds substantial worldwiderights to its discoveries through various patents, patent applications,trademarks and other intellectual property, technology and know-how.

 

Risk and Uncertainties

 

Thisreport includes forward looking statements which involve risk and uncertainty including,without limitation, risk of dependence on patents, trademarks, third partysuppliers, market acceptance of and demand for the Company’s products,distribution capabilities and the development of technology and governmentalregulatory approval thereof.

 

Sentencesor phrases that use words such as “believes”, “anticipates”, “hopes”, “plans”,“may”, “can”, “will”, “expects” and others are often used to flag such forwardlooking statements, but their absence does not necessarily mean a statement isnot forward looking.  Such statementsreflect management’s current opinion and are designed to help readersunderstand management’s thinking.  Bytheir very nature, however, such statements are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseexpected or projected.  Readers arecautioned not to place undo reliance on these forward looking statements whichspeak only as of the date hereof.  TheCompany undertakes no obligation to release publicly any revisions to theseforward looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.

 

Risksand uncertainties that may affect the Company’s operating results and businessperformance include:  the Company’sability to protect its patents and other proprietary rights; the volume andtiming of product sales; pricing; market acceptance of its products; the costsand effects of complying with laws and regulations relating to the environmentand to the manufacture, storage, distribution and labeling of the Company’sproducts; the ability to develop and maintain distribution and supplyarrangements; the effect of the Company’s accounting policies; changes in tax,fiscal and governmental and regulatory policies; economic factors such as theworldwide economy, interest rates, currency rates and currency movements;changes in the capital markets affecting the Company’s ability to raisecapital; the occurrence of litigation or claims; the loss or insolvency of amajor customer, distributor or supplier; losses of or changes in executivemanagement; the Company’s ability to continue product introductions andtechnological innovations; and other uncertainties and risks reported from timeto time in our reports filed with the Securities and Exchange Commission.  In addition, the Company notes that itsstock price can be affected by fluctuations in quarterly earnings.  There can be no assurance that the Company’searnings levels will meet investors’ expectations.

 

Substantiallyall of the Company’s products are subject to regulatory approval of or controlby various governmental agencies such as the FDA, USDA and EPA in the UnitedStates and their equivalents in international markets.  The exercise of control and regulatoryauthority by these agencies can have a material effect on the Company’sbusiness directly as it relates to the Company’s products and indirectly as itrelates to competitors’ products.

 

Withinthe Animal Health and Surface Disinfectant business segment, all of theCompany’s Animal Health products are sold through distributors having exclusiveor semi-exclusive rights to specified geographical territories.  The loss of a distributor can have amaterial effect on the Company’s sales, particularly, in the short-term until areplacement is found, contracted and trained in the sale of the Company’sproducts.  Further, the Company faceswell established competition in each of the markets where its Animal Healthproducts are sold.  Such competition,particularly, competition claiming equivalence to the Company’s products, canlimit the sales potential for Alcide’s products.

 

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Alcide’sFood Safety products participate in a rapidly evolving marketplace which by itsnature attracts innovation and competing technologies.  The Company’s SANOVA sales are based onperformance, price and convenience. Introduction of competitive products better meeting these customer needscan have a material impact on the Company’s ability to sell and expand the useof its SANOVA products.

 

TheCompany’s business model for its Food Safety business involves a capitalinvestment ranging from $20,000 to $500,000 for each user plant site dependingon the size of the operation.  Thecapital investments are depreciated over a five-year life while customercontracts range from one to four years. If a substantial number of customers elect not to renew their contracts,non-productive assets would exist until new customers are found.

 

Occasionally,the Company also incurs installation costs of between $80,000 and $120,000 toinstall the SANOVA equipment components at the customer site and connect thecomponents with plumbing and electrical interfaces to put the system intooperation.  Installation costs aredepreciated over the shorter of a five-year life or the contract term.

 

Theeconomic vitality of the industries served by the Company’s products can havean impact on Alcide’s ability to sell its products, expand sales and maintainproduct price levels.  Within the AnimalHealth business segment, the Company’s products are premium priced consistentwith their superior performance.  However,as dairy industry product margins are compressed, some farmers may discontinuethe use of Alcide products in favor of lower priced competitors’ products.  Likewise, the Company’s ability to sell andexpand sales of its Food Safety products may be impacted by economic conditionswithin the poultry and red meat industries.

 

CriticalAccounting Policies

 

•                                          Revenue Recognition

Revenuefrom sales of SANOVA food antimicrobials is recognized based on the terms ofthe Company’s contracts with individual customers.  For customers using more than 15,000 gallons of SANOVA per month,Alcide provides bulk shipments of inventory to the customer and the customer isinvoiced at month-end with revenue recognized based on the amount of productprocessed or gallons of SANOVA used. All other customers are invoiced and revenue is recognized at the timeSANOVA is shipped to their facilities. Payment in either case is due fifteen to thirty days after billing.

 

AnimalHealth and Surface Disinfectant sales are recognized at the time of shipment todistributors or to end users.  TheCompany provides a limited warranty to its distributors which limits theCompany’s obligation to replacement of defective product.  Such replacements have, for the past severalyears, been less than .1% of net sales. The distributors have no contractual right to return unsold product.

 

•                                          Depreciation andBook Value of SANOVA Plant Assets

Capitalinvestments for SANOVA plant assets are depreciated over a five-year life,while customer contracts range from one year to four years.  As the SANOVA food antimicrobial businesshas been in existence for less than five years, the Company has a limited,practical basis on which to assign depreciable life.  Management believes, however, based on over four and one halfyears experience, that well-maintained assets will be operational beyond fiveyears and, further, that if customers decide not to renew their contracts, theassets can be relocated to new customer sites. As of August 31, 2003, plant assets from two installations havebeen successfully redeployed to new sites. The cost to maintain the assets is charged to operations.

 

Commitmentsand Contingencies

 

Leases:  The Company leases certain property undernon-cancelable operating leases that expire through July 2009.  Insurance, utilities and maintenanceexpenses are borne by the Company. There are no contingent rentals or sublease rentals.

 

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SANOVAAgreements:  The Company has signedcontracts with poultry and beef processing plants for SANOVA systems to beinstalled in the second and third quarters of FY 2004, which will costapproximately $1,850,000.  As ofAugust 31, 2003, $1,120,000 of the equipment required was on hand forthese installations.

 

EmploymentAgreements:  One officer has a one year,automatically renewable, employment agreement which currently obligates theCompany to a base salary of $287,929 per year. Bonus compensation of 100% of base pay can be earned at the discretionof the Board of Directors.

 

RedeemableClass “B” Preferred Stock:  OnSeptember 30th of each year, the Company redeems a portion of itsoutstanding Series 2 Class “B” Preferred Stock.  The amount redeemed is equal to .7% of the Company’s prior yearnet income.  As the Company recorded netincome of $1,129,610 in fiscal 2003, it redeemed 3,012 shares of Series 2 Stockon September 30, 2003 for $7,906.50. This leaves a total of $159,239 of Class “B” Preferred Stock to beredeemed in subsequent fiscal years. The amounts to be redeemed subsequent to September 2003 depend uponfuture net income and are not yet known.

 

The following tablesummarizes the above commitments:

 
|                                           |   | **Less than 1 year** |      | **FY 2005** |   | **FY 2006** |   | **FY 2007** |    | **FY 2008** |   | **FY 2009** |   |
|------------------------------------------------|--------|----------------------|-----------|-------------|--------|-------------|--------|-------------|---------|-------------|--------|-------------|--------|
|                                           |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Operating Leases                               |   | $                    | 233,592   |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |
|                                           |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| SANOVA  Agreements                             |   | 730,000              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
| Employment Agreements                          |   | 287,929              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
|                                           |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Redeemable Class “B” Preferred Stock |   | 7,907                |      | —      |   | —      |   | —      |    | —      |   | —      |   |
| Total Contractual Commitments                  |   | $                    | 1,259,428 |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |

 

FinancialCondition and Results of Operations

 

NetSales

 

Net sales andlicense revenue totaling $5,196,596 for the quarter ended August 31, 2003were $151,404 higher than for the equivalent quarter last year.

 

Sales of SANOVAfood antimicrobial to the poultry and red meat industries totaled $3,527,631for the quarter ended August 31, 2003, $173,245 higher than the firstfiscal quarter last year.  At the end ofthe first quarter, SANOVA systems were contracted for and installed at 37poultry plants and 15 red meat plants. Eight of the poultry plants were using SANOVA applications bothpre-chill and post-chill, thus bringing the total to 60 operations at quarter’send.

 

The Company’sAnimal Health and Surface Disinfectant revenues for the quarter endedAugust 31, 2003 were $1,668,965, including $308,270 in licenserevenue.  During the first quarter lastfiscal year,  Animal Health and SurfaceDisinfectant revenues were $1,690,806, including $29,397 in license revenue.

 

Costof Goods Sold

 

Cost of goods soldwas 58% of total revenue for the quarter ended August 31, 2003, ascompared to 56% of total revenue for the equivalent period a year ago.

 

Cost of goods soldas a percentage of net sales for the SANOVA (Food Safety) business segment wasat 67% for the quarter ended August 31, 2003, as compared to 60% of netsales for the same period last year. The seven point increase in costs of goods as a percentage of sales wascaused by three factors each having approximately equal impact.  SANOVA usage increased in four plantsconcurrent with a transition to post-chill

 

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dip operations.Secondly, the under utilization of equipment idled at five sites late in thefirst quarter of 2003, continued into the first quarter of 2004 and lastly,investments made to transition into post-chill operations added to thedepreciation expense component of cost of goods.

 

Cost of goods soldfor the Animal Health and Surface Disinfectant business segment was 46% of netsales (excludes license revenue) for the quarter ended August 31, 2003versus 47% of net sales for the first quarter last year.  The decreased cost of goods sold as apercentage of net sales for the segment was caused primarily by a shift inproduct mix. 

 

Researchand Development Expense

 

Reflecting theconclusion of development activities related to the Company’s new Animal Healthproducts and the reduction in the scope of SANOVA process validation trials,research and development expenses for the quarter ended August 31, 2003were $479,415 which were $111,209, or, 19% lower than for the equivalent perioda year ago.

 

Selling,General and Administrative Expense

 

Selling, generaland administrative expense of $1,570,034 for the quarter ended August 31,2003 was $34,660 higher than for the equivalent quarter last year.  Although SG&A expenses in total arewithin 2% of the first quarter prior year amount, there were severalsignificant expense category increases and decreases when compared to prioryear:

 

•                  During the firstquarter of fiscal 2003 Alcide paid executive bonuses totaling $288,481.  No executive bonuses were paid during thefirst quarter of fiscal 2004.

 

•                  Expenses relatedto patent/trademark registration and fees to maintain patents were $28,000during the first quarter of fiscal 2004 as compared to approximately $50,000during the first quarter of fiscal 2003.

 

•                  During the firstquarter of fiscal 2004 the Company spent $97,123 in legal expenses to supportits patent infringement suit against Biocide International.  While no such expenditures were made duringthe first quarter of fiscal 2003.  Amemorandum of understanding to settle the suit has subsequently been entered onOctober 2, 2003.

 

•                  Salaries, benefitsand travel expenses related to SANOVA entry into the seafood and internationalmarkets were approximately $45,000 during the first quarter of 2004 while nosuch expenses occurred during the first quarter of fiscal 2003.

 

•                  During the firstquarter of 2004 equipment from two non-productive SANOVA sites was removed andrelocated to two newly contracted sites. The new sites started early in the second quarter but the $40,000expenses to remove the equipment occurred during the first quarter.

 

InterestIncome

 

Interest income was$4,087 for the quarter ended August 31, 2003 versus $7,867 for the quarterlast year.  The decrease was due tolower prevailing short-term interest rates.

 

InterestExpense

 

The Companyincurred no interest expense during the quarter ended August 31, 2003because it has completely repaid a $2,000,000 draw on its line of credit whichduring the first quarter last year resulted in interest expense of $21,048.

 

Liquidity and Capital Resources

 

The Company’s cash and cash equivalents totaled $2,900,150 on August 31,2003, as compared to $2,286,641 on May 31, 2003.  During the first quarter of fiscal 2004, the Company generatedcash from operating activities

 

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of $1,251,478 and invested $637,969 in the acquisition of new assets tosupport the expanding SANOVA business. At this time, the Company expects to fund its existing operations andgrowth with its current cash balance plus cash generated by operations.  If growth exceeds current expectations, itmay be necessary to draw on the Company’s line of credit.

 

Outlook

•                                          SANOVA FoodQuality System

Managementexpects that the size of the Company’s food antimicrobial business willcontinue to expand. Five new operations were added during the first quarter offiscal 2003 and one existing customer added a post-chill operation.  Since the end of the fiscal quarter two newpoultry customers were added, one red meat grinding operation was started andone existing poultry customer added a post-chill operation.  Management expects to contract and start oneto three new SANOVA operations per month during the current fiscal year.

 

•                                          Animal Health andSurface Disinfectant Products

Theworldwide dairy herd is decreasing slightly as cows become more productive,partly through increased use of mastitis prevention products such as thosemarketed by Alcide.  In addition, theCompany now faces direct competition from products similar to its products,UDDERgold, UDDERgold Plus and 4XLA®.  To counter this competitive threat, the Company has introducedadvancements to its technology in the form of UDDERgold Platinum® inEurope and UDDERgold 5-Star, an improved barrier product, in the UnitedStates.  The Company’s strategy is tomaintain a performance edge over competing products.  However, because the Company sells through distributors, bothchanges in the distribution network and the introduction of new products cancause the Company’s sales to shift from quarter to quarter as distributorsincrease or decrease their inventories of Alcide products.  On an ongoing basis, management believesthat its distribution network, combined with evolving new productintroductions, will enable Alcide to maintain its share of the market.

 

ITEM 3.                             Quantitative and Qualitative DisclosuresAbout Market Risk

 

The Company is not significantly exposed tomarket risks from changes in interest rates. At its present growth rate, theCompany expects to be in a balanced cash position during fiscal 2004.  The Company’s policy is to invest any excesscash resources in low risk, short-term and intermediate-term U.S. Treasuryinstruments and bank money market funds to minimize market risks.

 

The Company has no direct foreign currencyexposure.  All of its presenttransactions with international distributors are denominated in U.S. dollars.

 

ITEM 4.                             Controls and Procedures

 

a) The Company’s Chairman and CEO, and President and CFO, after evaluatingthe effectiveness of the Company’s “disclosure controls and procedures” (as defined in the SecuritiesExchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of the end of theperiod covered by this quarterly report, have concluded that, as of that date,the Company’s disclosure controls and procedures were adequate and designed toensure that material information relating to the Company and its consolidatedsubsidiary would be made known to them by others within those entities.

 

b) There were no significant changes in the Company’s internal controls orin other factors that could significantly affect the Company’s disclosure controlsand procedures subsequent to the end of the period covered by this quarterlyreport.  There were no significantdeficiencies or material weaknesses, and therefore, there were no correctiveactions taken.

 

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PART II.

 

OTHER INFORMATION

 

ITEM 1.                             Legal Proceedings

 

On October 2, 2003 a memorandum ofunderstanding was entered into by the Company and Biocide InternationalIncorporated to settle the patent infringement lawsuit brought by the Companyagainst Biocide on October 31, 2002. Under the terms of the settlement, Biocide has agreed to limit its salesin the red meat industry to products having a ph of greater than 5.5, a levelat which Alcide management believes such products will not provide a competitivethreat to Alcide’s products.  Inaddition, Biocide agreed to pay Alcide a royalty on future Biocide sales to thered meat industry.

 

ITEM 6.                             Exhibits and Reports on Form 8-K

 

a) Exhibits:

 
| 3.2    |   | ByLaws, as amended to  date.                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| 10.36  |   | Licensing Agreement by and between the Company and Ferdinand  Eimermacher GmbH & Co. KG, dated July 1, 2003, covering the United  States and Mexico. |
|   |   |                                                                                                                                                          |
| 31.1   |   | Certification of Periodic  Report by Chairman and Chief Executive Officer of Corporation.                                                                     |
|   |   |                                                                                                                                                          |
| 31.2   |   | Certification of Periodic  report by President and Chief Financial Officer of Alcide Corporation.                                                             |
|   |   |                                                                                                                                                          |
| 32.1   |   | Certification pursuant to  18 U.S.C. Section 1350.                                                                                                       |

 

b) Reports on Form 8-K:

 

Report on Form 8-K dated August 25, 2003reporting results of operations for the fiscal year ended May 31, 2003.

 

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SIGNATURE

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                                          | ALCIDE CORPORATION                   |
|-----------------------------------------------|--------------------------------------|
|                                          | The Registrant                       |
|                                          |                                 |
|                                          |                                 |
| Date:   October 14,  2003 | By  /s/   John P. Richards |   |
|                                          | John P. Richards                     |
|                                          | President                            |
|                                          | Chief Financial Officer              |

 

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